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Financial Planning, Investment Counselling, Tax and Accounting

CPP Changes in 2012 - Timing Decision May Be Affected

by Marc Lamontagne, CFP, R.F.P., FMA

Most of these changes do not affect anyone who is currently receiving CPP benefits, or anyone who is planning to collect their pension prior to 2012. That being said, your pension timing decision may be affected by some of these changes.

Removal of work cessation test

If you plan to continue working or start a business, one of the obstacles to collecting a pension is the requirement to substantially retire prior to your initial receipt of CPP. This sometimes leads to a voluntary loss of earnings or even having to mislead CPP regarding your work plans. QPP recipients do not face this requirement. When I spoke to CPP unofficially about strategically planning one’s earnings in order to qualify, they reported that they were aware of the practice, but did not audit files because this did not impact the CPP calculation. Here is the good news: starting in 2012, you will no longer be required to reduce your earnings in order to qualify for CPP when retiring prior to age 65.

Increase in low earning dropout rate

Currently when calculating the amount of your pension, CPP will adjust or “dropout” 15% of your lowest income years, which helps to increase the pension calculation. Changes in your favor: the general dropout rate will increase to 16% in 2012 and 17% in 2014.

New contributions even if receiving a pension

If you begin collecting CPP on retirement prior to age 65 and subsequently decide to return to work, you are exempt from making any new contributions. Be aware of this change: effective in 2012, if you return to work you will have to again make contributions until age 65, but this will result in increased retirement benefits, even if you are already receiving the maximum benefit. This change will affect everyone, including those receiving CPP prior to 2012. It will also allow working beneficiaries to continue to build CPP pension income and particularly help those who are not close to the maximum.

Adjustments for early and late start dates

The basic formula for adjusting your CPP pension if you don’t start on your 65th birthday is to deduct or add 0.5% per month up to a maximum of 30%. This means that if you begin at age 60, you will receive 70% of your full pension and, if you wait until age 70, you will receive 130% of the pension.

Under the new rules, the percentage adjustment will gradually change over five years to 0.6% a month for early starts (i.e., prior to age 65) and 0.7% over three years for late starts (i.e., after age 65).

Changes favor later start date: that means you could potentially earn 142% of the maximum by waiting until age 70. These changes are being made for “actuarial fairness” reasons, reflecting your contribution years and years in receipt of the pension. Essentially this means that under the current rules, if you took CPP at age 60 you were getting a better deal.

So, does this change require a rethink about when to begin receipt of CPP? In fact, the issues around that decision don’t really change. As an example, if you are planning to retire at age 60 and need the CPP pension income to live on, then you should probably accept it at age 60. This 6% additional penalty will amount to only about 1% less income for someone with a total retirement income of $50,000 a year.

From a purely financial viewpoint, you are always better to wait until 65 or even 70, because at a certain point the higher monthly amount will begin to outweigh the smaller earlier amount. The breakeven point is currently about age 78, so you will have to live past that age to benefit from the late start. Since you don’t know how long you will live, logic would suggest taking CPP earlier rather than later. On the other hand, if you expect longevity, then a late start CPP pension would give you a higher, inflation-adjusted, permanent income and reduce the chances of running out of money in your later retirement years.

Are you 59 or older and not receiving CPP?

If you were planning to start CPP around the time of these changes, then it may be worth your while to reconsider your planned start date. It may even make sense to apply for an early start of benefits in order to avoid the higher penalty.

Unredeemed Gift Cards

From a fiscal perspective, statistics show that gift cards aren't the savviest holiday gift choice for the consumer. For starters, between 8 and 10 per cent of gift cards go unredeemed. They sit in the back of people's wallets, hide away in clothes drawers or get tossed into the trash accidentally. Those stray gift cards added up to a massive, unspent $8 billion in 2007. That's more than double the amount of annual credit and debit card fraud in the United States! For example, Best Buy Corporation profited $43 million in the 2006 fiscal year thanks to neglected gift cards. When companies claim the profits from unredeemed gift cards as income, it's referred to as breakage. Breakage is a term used in accounting to indicate gift cards that have been sold but never redeemed. Revenue from breakage is almost entirely profit, since companies need not provide any goods or services for unredeemed gift cards. In a tough economy, retail and restaurant gift cards carry an added risk of becoming worthless. If you buy a gift card from a store, and that store shuts down before someone cashes in the card, it's basically as good as gone. Some of the businesses that declared bankruptcy between 2007 and 2010 did so with millions left in outstanding gift cards. To remedy the situation, some stores were allowed to accept the gift cards, but only if the shopper spent double the card’s value. When the economy is in a downturn, it may be more prudent to spend a little more time and seek out gift card alternatives that are a better bargain. Retailers want customers in their stores and will crank up the sales to make that happen. In that case, instead of buying a $50 gift card, you could leave with an actual gift marked down to $35!.

Disclaimer

Information in this newsletter is general in nature and should not be construed as advice